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Woolworths committed to cutting prices in battle with Coles, Aldi

Sue Mitchell

Price wars: Industry analysts believe Woolworths is losing its price leadership to Coles, which claims to have reduced prices by 5.2 per cent cumulatively over the last five years. Photo: Penny Stephens

Woolworths says it will invest $750 million into reducing food and liquor prices in 2015 and has refuted analyst claims that it has taken its foot off the promotional pedal to boost profits.

As Coles unveiled plans to reinvest cost savings from a $38 million redundancy program into cutting grocery prices and fixing up stores, Woolworths reiterated that it was committed to reducing prices after saving customers $750 million in 2014 and trimming the cost of the average shopping basket by 3.1 per cent.

"Investment in prices for our customers is clearly a key priority for Woolworths given the competitive market in which we're operating," a Woolworths spokesman told Fairfax Media on Thursday.

Woolworths chief Grant O'Brien says the supermarket has gained market share at the fastest rate over the past three years. Photo: Christopher Pearce

Woolworths chief executive Grant O'Brien and director of supermarkets Tjeerd Jegen have rejected suggestions from analysts that Woolworths raised prices in the June quarter to boost margins in food and liquor and achieve its profit guidance in the face of weaker earnings from BIG W and losses in home improvement.

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Mr O'Brien said Woolworths prices had been "consistent" in the third and fourth quarters and it had gained ­market share at the fastest rate for three years.

"We measure 4000 prices every single week," said Mr Jegen. "And on those 4000 prices every single week we're the lowest-priced supermarket in Australia and have been and will be."

Losing to Coles?

However, analysts believe Woolworths is losing its price leadership to Coles, which claims to have reduced prices by 5.2 per cent cumulatively over the last five years.

They say Woolworths' gross margin, which is the difference between buying and selling prices, has risen more than 300 basis points over the past few years, contrary to Woolworths' strategy between 1999 and 2006, when lower gross margin helped fuel a virtuous cycle of sales growth and cost efficiency.

Morgan Stanley analyst Tom Kierath said Woolworths food-only gross margin rose 33 basis points in the second half of 2014, "indicating that Woolworths has to some extent lifted prices to achieve its 2014 [profit] guidance."

"This is a risky strategy as it enables competitors to win price leadership, which as other supermarkets around the world (i.e. Tesco) have found is very difficult to win back," Mr Kierath said.

Citigroup analyst Craig Woolford estimated that food and liquor margins rose 30 basis points, adjusting for changes in petrol discounting. "Margins were up but there was a cost in terms of lost market share," Mr Woolford said.

Same-store sales growth at Woolworths slowed to 2.1 per cent in the June quarter from 3.5 per cent in the March quarter and was below Coles' same-store sales growth of 4.1 per cent.

'Misjudged' fourth quarter spend

Credit Suisse analyst Grant Saligari said Woolworths may have "misjudged" the promotional spend required in the fourth quarter, resulting in a slower rate of sales growth and a very strong profit performance.

Standard shelf prices at Woolworths (excluding promotions) rose from 3.1 per cent to 3.5 per cent in the fourth quarter and average deflation (which takes into account discounts and promotions) was 1.7 per cent compared with 2.9 per cent in the third quarter.

"We've not changed the rate of investment that we've made in promotional prices from the third quarter to the fourth quarter," Mr O'Brien said.

When asked if Woolworths would step up price reinvestment this year, Mr Jegen said the investment in price last year was $750 million "and it will be more or less equal for the two years".

Woolworths also said it responded to competition from Aldi by matching prices for Homebrand products with Aldi's private label products.

"We know what the key value items are and we make sure we're lined up on those," Mr O'Brien said.

Aldi cheaper by 10 per cent

However, Morgan Stanley said Aldi's own-brand products were 10 per cent cheaper than Homebrand products, based on a basket of 15 items. For ­example, Woolworths Homebrand cheese was $7.30 compared with $6.00 at Aldi, Homebrand canned tomatoes were $1.92 compared with $1.18 at Aldi and caster sugar $2.25 compared with $1.99 at Aldi.

Mr Kierath said Woolworths was best placed among its rivals to compete hard on price, given it had the best buying terms and most efficient supply chain, but had lost price leadership.

"By our estimates, Woolworths' food and liquor gross margins have increased by 330 basis points since 2006 and this has contributed to a loss of price leadership," he said.

Woolworths says gross margins have risen due to better buying, increased sales of private label ­products, which generate higher ­margins than national brands, and by reducing shrinkage.

However, analysts say Woolworths should be reinvesting more gains from private label, shrinkage and better buying into reducing prices to accelerate sales growth, as it did under former chief executive Roger Corbett.

They point to the problems at UK retailer Tesco, which failed to respond to discounters Aldi and Lidl and is now paying the price, issuing its fourth profit warning.

Woolworths, however, expects earnings to grow 4 per cent to 7 per cent this year and Mr O'Brien remains confident the group will eventually achieve its 10 per cent profit growth aspirations.